One of the biggest challenges we face in life is saving for retirement. The actions we take today can determine our quality of life after we stop working.

Yoram Lustig

Yoram Lustig

My three principles for retirement planning are understand - know what you can and should do; plan - formulate a strategy to increase the chances of achieving your realistically desired retirement goals; and act - turn your plan into reality.

Here is a list of the top ten things I think you should do for a richer retirement.

  1. Start today. The sooner you start considering your retirement and acting, the more time you have to save, invest, accumulate wealth and learn how to properly do it. Consider taking professional advice. Use online free sources such as www.pensionwise.gov.uk to educate yourself and allow you to challenge any advice. This is a lifelong journey - take the first step.
  2. Understand yourself. Take stock of what you have. Are you eligible to State Pension (check on www.gov.uk your state pension age and eligibility)? Are you a member of a defined benefit scheme (DB, known as final salary), defined contribution (DC, known as money purchase) or both (ask your employer)? Is your employer contributing to your occupational scheme or should you arrange a personal one? Are you eligible for automatic enrolment? The answers to these and other questions help assess your situation before planning.
  3. Plan. Visualise your life after retirement. Use current annuity rates (available online) as a guide to the income you can generate from DC savings. You will need between 50% and 80% of your current income to maintain your standard of living. Think broadly when to retire (after the age of 55). Consider postponing retirement or using flexible retirement (accessing some pension savings while continuing working part-time) as it allows saving more. Use a free online pension calculator to figure out how much you and your employer need to contribute into your pension to reach your saving target, considering expected returns from saving and investing.
  4. Use tax-efficient tools. The two common tax-efficient saving and investing vehicles are pensions and ISAs. Aim to contribute as much as possible to your pension while enjoying a tax-relief (contributions into pensions are tax-free as long as their total is below your annual allowance - generally, £40,000). Over your life your pension's value can grow by up to £1 million before you pay tax on contributions. Aim to save as much as annual limit (£15,240) permits in ISAs. Unlike contributions into pensions, contributions into ISAs are made after paying income tax. However, while withdrawals from pension are subject to income tax, those from ISAs are tax-free. Interest and gains on money within both pension and ISAs are completely tax-free. Pensions are for long-term saving, while ISAs can be flexibly accessed at any time.
  5. Diversify income sources. Annuity rates, saving rates and bond yields are currently low. In a low-yield environment relying on one source of income is risky. Try to arrange a number of retirement income streams, each with a different role. State Pension, DB and annuity generate guaranteed, stable income for life. It is insurance against longevity and income providing for minimum financial needs. Investing in stocks and bonds is a source of variable income. While riskier than annuities, it offers flexibility to tap the lump sum invested. A buy-to-let property could be another source of income, different from the others. But it is for those who are up to it.
  6. Invest. Cash under the mattress will lag inflation. Invest your cash in line with your risk tolerance and circumstances. Generating returns need to investment risk. Diversify your investments to reduce risk. Plan to gradually de-risk your portfolio when approaching retirement. Reduce charges without compromising quality. Investing requires you to do your homework. Read a book or two on investing, talk with professionals to get advice and experiment with investing to learn. Small gains accumulate over the long-term.
  7. Buy your residence. Buying your home with a mortgage is long-term saving, as you repay the loan. You will need a place to live after retirement. Hopefully, your house's value will appreciate, allowing you to release some capital post retirement. You can do so by downsizing (tax efficiently since selling your main resident is usually free of capital gains tax) or through equity release products (basically, you sell your home for lump sum or income, but you live in it for the rest of your life).
  8. Maintain flexibility. One constant in retirement planning is things keep changing. Regulations, as well as your personal circumstances, might vary. Be prepared and able to recalculate your route by holding some liquid assets. Also, ensure you are insured to mitigate unbearable risks, such as illness and death to protect you and your loved ones. Some pensions include death-in-service benefits.
  9. Stick with your plan. Planning is one thing. Sticking with a plan is another. When markets fall, the future seems bleak or current financial needs seem more urging than saving, sticking with your plan will be tested. Remember, this is a marathon; you must look far ahead and exercise discipline. However, do not be rigid. If circumstances change revisit your plan and use the flexibility to change it if the situation warrants it.
  10. Retirement is a beginning, not an end. Taking out your pension needs planning. Minimise taxes and ensure not to spend it all. You can take your DC savings in three ways: cash lump sum (25% is tax free), flexible drawdown (take variable income while the remainder stays invested) and/or annuity. Use the lump sum to pay off debt, buy property or spend some on yourself. Plan to continue investing during retirement - hopefully your retirement will be long. You need your assets to continue growing, at least keeping pace with inflation. If you have done the right decisions along the way, you have better chances of financially secured golden years. And do not forget to invest in your health since you need it to accumulate wealth.

Yoram Lustig is the author the new Financial Times Guide: Saving and Investing for Retirement. It is out now, priced £26.99 from FT Publishing, available from Amazon .